The Rise and Fall of King of Good Times

Vijay Mallya’s conglomerate UB Group is in danger of falling apart. The man who likes to be called the ‘King of good times’ runs the risk of being left without an empire.
Over the past 10 years the Indian economy has surged high, and with it enterprises such as Vijay Mallya’s Kingfisher Airlines. But now that the super-rich tycoon’s fleet is grounded and debt-ridden, does it mean the boom-time is over for India?

Brewing Hard Times

In fact the Indian “super-rich” can afford something a little more exclusive. Vijay Mallya, India’s most flamboyant businessman and the chairman of the vast beer and spirits conglomerate United Breweries, has a sprawling coastal villa in Goa and a dozen or so other properties.

For Mallya, the self-crowned “king of good times”, has fallen on hard times. His seven-year-old airline has been grounded after authorities suspended its licence to fly on safety concerns. Crippled by debts which may exceed $2bn, Kingfisher had difficulty paying employees’ salaries. When engineers downed tools, its planes stopped flying. There were even reports, denied by Mallya, that the tycoon’s own private jet might be impounded by Indian airport authorities, which say Kingfisher owes them huge sums. Some suggested that the man described as India’s Richard Branson might choose not to come back at all.

Recent years have seen corruption scandals involving collusion between officials, bureaucrats and businessmen costing the public exchequer tens of billions of dollars but even in a country where allegations of graft are common, no one is alleging any wrongdoing by Mallya.

Ethics vs Business

Anyway, the money came easily, without any illegality. In the past five years, the debt of the 10 biggest corporate houses in the country to banks has risen fivefold. Now more than an eighth of all bank loans in the country are to these family firms. Mallya’s companies are not among them, but the tendency of Indian public lending institutions to lend vast sums on comfortable terms to people who are already extremely wealthy, rather than to small businessmen and entrepreneurs, is well established. The banks’ mantra is to recapitalise those who already have massive net worth, often without real collateral,This cosy relationship is a key reason for the extraordinary wealth of many of India’s super-rich.

It is perhaps only when living in India, and exposed every day to the white heat generated by the desire of so many people for a better life, that such adulation becomes comprehensible. There are tens of millions of people who are living vicariously through Mallya.The tycoon has1.46m followers on Twitter, 50,000-odd more than Oprah Winfrey.

Wilful Defaulter

Mallya’s 25-year-old son Siddhartha, known as Sid, who has been groomed as the tycoon’s successor at the head of the family business. Sid’s onerous task in recent weeks has been to scour the world for models for the next Kingfisher calendar. Like his father, he is a fan of social networking.

Only in India will banks go around stating the obvious and then expect to be attacked for bad faith. On 1st September, the United Bank of India (UBI), itself in no great financial shape, declared Vijay Mallya a “wilful defaulter” on a Rs 7.5 crore overdraft. And the man who actually owes around 17 banks over Rs 7,000 crore on account of bad loans to his now-defunct Kingfisher Airlines, claimed this was being done “without a hearing”.

Use of Power to Hide the Wrong Deeds

“They are making me a bakra (sacrificial goat) because they want to set an example for other defaulters,” he told The Times of India without any sense of irony. He should ask himself: how is it a crime to make an example of you when you are one who owes them money? Big money. Moreover, does it matter whether he is a “wilful defaulter” or merely a mammoth defaulter?

Mallya thinks he has lots of legal alternatives even now, and knowing the procastination of the Indian legal system, he may well get as many lives as the proverbial cat.

If anyone is the real bakra, it is the banking system, which has been super-indulgent with a man who is a byword for indulgence himself.

His equity assets add up to around Rs 3,800 crore, which is far short of what he owes banks. While he obviously has a few more assets – a villa here, some holdings in the F1 team that he co-owns with a jailbird (Subrata Roy of Sahara Group), some other pricey realty – it is doubtful if they will cover all his dues. One estimate is that roughly Rs 6,000 crore of his total dues are covered by collateral. But who knows what they are worth when tanned in distress?

But this is where the script changes. Once you are declared a “wilful” defaulter, it sets in motion a downwardtrack of financial credibility and creditworthiness. Your assets become caged assets, your ability to leverage your reputation reduces, your presence on your own company boards becomes untenable.

So when Mallya says he has more legal options, he may be technically right, but the countdown to business shrinkage has just accelerated. His new business partners, Diageo and Heineken, who helped ease his cash position by buying chunks of his booze and beer businesses, may now tend to view him as a has-been, if not a dead duck.

It is thanks to endless legal delays that Mallya is still keeping his head above water – though the water level is rising.

The Mallya case tells us exactly why India needs an efficient bankruptcy law – and why public sector banks need to be made autonomous from the government.

Just as the Bhushan Steel case showed, the fact is Mallya would not have been shown the kind of patience by banks if all his lenders had been autonomous – accountable to private investors and shareholders.

Due Diligence by Banks

A strong bankruptcy law would not only have protected the banks, but also Mallya. It was because he did not declare bankruptcy earlier that he is now in danger of losing his entire empire – unless he has pieces of it abroad that Indian law cannot reach.

We need a strong law to allow bankers (or a group of minority investors or the regulators) to appoint a new boss or independent directors in companies where public interest is at stake. It was because Mallya could not be sacked from Kingfisher early enough – sometime probably in 2010 – that the airline’s pain dragged endlessly.

Regardless of whether their loans are good or likely to turn problematic, banks need to have the right to make a pre-emptive strike on management before the operations actually get into a tailspin. Once a company’s operations start winding down, failure is self-propelling for credit starts drying up and the stock starts tanking. Change of management (even a temporary change) is needed to assure all lenders and shareholders that corrective steps are being taken and the operations of the company will not be affected. If the banks had moved in on Kingfisher Airlines before it went kaput, they could have taken an early hit and spared Mallya from having to become a bakra.

Bankers usually have a fair idea about how a company is faring based on account statements and audit reports – and their own understanding of how the industry itself is faring. But public sector banks, with their dilatory systems and lack of accountability, are likely to be more vulnerable to bribery and hanky-panky for the simple reason that bankers have short tenures and keep getting transferred. The system of rewards and penalties for performance and non-performance is weaker in public sector banks. This is why ICICI Bank could bail out of Kingfisher in mid-2012, but the public sectorbakras are still left holding the sack.

Crony Capitalism

Cronyism thrives primarily through its ability to influence bankers and regulators – of course, with help from politicians and bureaucrats. This calls for a clear separation of public sector banks’ reporting structures from their administrative ministry (in this case, finance). RBI governor Raghuram Rajan said the other day that the government could put all bank shakes in a separate special purpose vehicle so that bankers were insulated from political pressures to lend.

In the case of government-owned institutions, you can’t change the owner, but you can at least prevent the owner from damaging taxpayer assets.

Crony capitalism – if left unchecked – ultimately consumes both the crony and his capital. This is the moral of the Vijay Mallya story.